Food prices see biggest fall in a year ahead of Brexit

Grocery prices fell by 0.8 per cent in June, an increase from a 0.3 per cent fall in May

Helen Dickinson, BRC chief executive, called the drop in shop prices “extraordinary” saying that it should provide a boom for household’s budgets (Getty)

UK shoppers’ budgets have been boosted by falling food prices, which saw their biggest decline for more than a year in June.

Grocery prices fell by 0.8 per cent, following a 0.3 per cent fall in May.

The data from the British Retail Consortium (BRC) Nielsen Shop Price Index reflects the period from 6 to 10 June, just ahead of the EU referendum.

Overall shop deflation accelerated to 2 per cent year-on year, meaning that shoppers have been able to enjoy smaller prices for 38 months in a row.

Helen Dickinson, BRC chief executive, called the drop in shop prices “extraordinary” saying that it should provide a boom for household’s budgets.

“While [the deflationary run] has been driven largely by falling prices for non-food items we have, from time to time, seen food in deflationary territory as well – which provides the real boon for household budgets,” Ms Dickinson said.

“While the good news for household budgets continues, prices in store will eventually rise again,” she added.

Ms Dickinson warned that that the time it take for prices to increase again will depend on a number of factors, including the future value of the pound, commodity prices and any eventual impact of the Brexit vote on input costs.

Recent figures by Kantar World Panel suggested that a weaker pound could signal the end of cheaper grocery prices for UK consumers as 40 per cent of the food we consume is now from overseas.

“Any long-term change in exchange rates may threaten the current period of cheaper groceries,” said Fraser McKevitt, head of retail and consumer insight at Kantar.

The sharp decline in food prices has put pressure on UK’s biggest grocers as they fight a price war against German discounters Aldi and Lidl.

Shares in Tesco, the UK’s biggest supermarket, were down 9 per cent at 160p on opening on Tuesday but recovered slightly to 161.05p by the end of the day. Morrisons shares dropped 6.6 per cent to 174p before falling even further by 6.94 to 172.70p by the end of the afternoon.

Sainsbury’s was down 3.6 per cent at 215p at 2pm before recovering to 215.90p.

The sharp fall followed a note from David McCarthy, HSBC analyst, suggesting Asda will dramatically cut its prices this summer.

HSBC noted that David Cheesewright, the chief executive of Walmart, the US owner of Asda, recently told shareholders that the UK supermarket chain will prioritise sales over margin.

“If Asda does reposition fundamentally, then it could seriously damage sector profitability,” McCarthy said.

“If Asda decided to invest half its margin into price, a competitor reaction could wipe out almost all industry profitability and would force an industry restructure,” he added.

HSBC, reflecting the increased risk and uncertainty, downgraded Tesco to a “hold” rating from “buy”, and cut Morrisons to “reduce” from “hold”, but kept Sainsbury's at “reduce”.